Vickers report: banking reforms won't work if they are watered down

A view of 'the Gherkin' and Canary Wharf at sunrise across the City of London Photograph: Stefan Rousseau/PA

There are two important points to remember about the Vickers report on banking reforms. First, it was presented as a pragmatic compromise. The commissioners were trying to ensure that the UK's banking system could never again threaten to sink the economy and UK taxpayers but, at the same time, they had an eye on banks' long-term competitive position and their ability to serve the economy. Thus ringfencing of retail operations within banks, rather than full separation, was judged to offer the best solution from a cost/benefit perspective.

Second, Sir John Vickers, who chaired the panel, said the recommendations were not a menu of options for the government – they were intended to be adopted in full.

It is alarming, therefore, to see further compromises slipping into the reforms after nine months of contemplation by the government. Leverage ratios for big banks will be lower than Vickers advised – instead of a 4% ratio of pure equity to gross assets, 3% will be allowed. Why? Well, 3% is the international norm, as determined by the Basel regulators.

The dilution of Vickers' idea looks to be a lobbying victory for the big banks, especially HSBC and Standard Chartered, who play primarily on foreign fields and were grumbling most loudly about the threat to their ability to compete.

But remember the specific nature of the UK banking crisis: it was so acute because the banks were so large in relation to the size of the UK economy. There should be a sound reason, then, for going further than international standards – the little old UK needs extra protection from the risks presented by so many giant banks.

Vickers made the point in his response to the government's plan. "The white paper proposals are far-reaching, but on some points – such as limits on the leverage of big banks – we believe they should go further."